Beating Up The Rich

In amongst the knob gags and poo jokes, someone occasionally writes something serious on Twitter. The other day someone wrote this:

The top 10% of earners pay more than 50% of all income tax. When can we stop beating up on the rich?

It got retweeted and found its way into my timeline. I did try to start a debate with the originator but they didn’t seem to want to take part. Twitter is a fairly clumsy medium for doing so in any case.

I hope I am not doing the originator a disservice but I think the case being made was one I have heard on several occasions – that because such a large proportion of tax is coming from a relatively small proportion of the population they must be more than paying their way and it would be unfair to ask them for even more.

The point I wanted to make was that this statistic on its own doesn’t really tell us enough to know whether we should stop beating up the rich or not.

(I think we are talking about a metaphorical beating up here. I want to make it explicitly clear that I do not condone the beating up of rich people irrespective of the income tax rate for high earners. Except perhaps Duncan Bannatyne and even then no more than a wedgie and a titty twister.)

So why does this statistic not tell us enough on its own?

Reason #1

Let’s look at two fictional economies:

Thatcherland

The country of Thatcherland has 10 residents. Nine of them earn £10,000 per year. One earns £10,000,000 per year.
Income tax is a flat 30% irrespective of salary.

=> In Thatcherland the richest 10% of earners pay 99% of the total income tax.

Getoffmyland

The country of Getoffmyland is populated by 10 farmers. Nine of them earn £10,000 per year. One earns £30,000 per year.
In Getoffmyland, income tax on salaries up to £20,000 pay income tax at 10%. For anything over £20,000 income tax is 40%.

=> In Getoffmyland, the top 10% of earners pay 40% of the total income tax.

If we simply assume that a higher proportion of income tax paid by the rich is equivalent to fairness then Thatcherland comes out as a brilliantly fair economy! Look, that lovely rich person is paying almost all the income tax. The other 90% of residents only have to find 1% between them!

Of course, it isn’t fair though because we just neglected to take into account the income gap between the rich and the poor: If the income is unevenly distributed in the first place then it should not be a big surprise to anyone that the income tax is too.

Reason #2

The statistic tells us only about income tax and we can’t make a valid judgment without taking into account all the other taxes we have to pay. e.g.

  • In Getoffmyland there is another tax which farmers have to pay based on the size of their farmhouse. The bigger it is the more they have to pay.
  • In Thatcherland, this tax has been replaced with a poll tax where all residents pay the same.

Even if the income tax were fair in Thatcherland we would be fairly rash to declare the whole tax system fair without taking the poll tax into account.

Let’s forget about our fictional economies and move to a real one. The UK government is currently in the process of implementing fiscal austerity. At the highest level they have two ways to do this:

  • Decrease Government spending
  • Increase Taxes

It seems to me they are a lot keener on adjusting the former than they are the latter and I do have a big concern about this. In August the IFS published an analysis of the government’s emergency budget and found that contrary to George Osborne’s claims the policies were not progressive. i.e. they proportionally penalised the poor more than the rich. (You can read the post I wrote about that here.)

This shouldn’t be a big surprise. If you hugely reduce the budget of local councils then libraries close, public transport services reduce etc and those services benefit the poor more than the rich who buy their own books and have their own cars. Additionally there have been much publicised cuts to both housing benefit and tax credits and despite what the Daily Mail says, people who claim benefits are not all millionaire hoodwinkers.

Strangely though, throughout all of this, no one has seemed to consider for 5 minutes financing any of this through a rise in income tax on the wealthy (metaphorically beating them up) and I really don’t for the life of me understand why. Austerity in the current climate is foolhardy but if you are dumb enough to want to implement it, why not start with the people who aren’t going to starve?

Prior to the downturn the UK economy had enjoyed 15 years of sustained growth and a great many people benefited because of this. Now the economy is in a bad way, why is a government hell bent on austerity, not considering going back to those who have benefited the most and asking them to contribute more? It seems especially odd when the alternative is asking the poor to foot the bill.

I must though, be fair to the government and highlight a progressive policy they are implementing – the freezing of the television license fee. It is just a shame that David Cameron had to get in bed with Rupert Murdoch to come up with one.

Leaving the rich untouched and taking it all from the poor just increases the income gap, pushing us still further towards the economy in Thatcherland.

And as we approach Thatcherland, the richest 10% will pay more and more of the income tax.

And things will be more and more unfair.

RedEaredRabbit

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About RedEaredRabbit
My name is RedEaredRabbit, King of Kings. Look on my works ye Mighty and despair.

3 Responses to Beating Up The Rich

  1. Simon Cooke says:

    Would that life were so simple, dear Rabbit. While your argument is sound as you frame it, the problem really lies in how we tax people. So long as we tax income, we hve to define that income and count that income in order to tax it. This presents the opportunity to alter income levels especially for the rich.

    Let me explain. Say I own a large business and this year pay myself £1,000,000 and pay income tax at 40% (I’ll ignore NI for simplicity if that’s OK). Next year I have to pay tax at 50% but I am not prepared to pay any more in taxes than this year. So rather than pay myself £1,000,000, I pay myself £800,000. Remember this is dome without any of those pesky dodges and fiddles. If the squeeze gets too hard I simply more to the next door country where rates are lower and pay taxes there.

    The boring truth is that – in most circumstances – cutting taxes on income raises the tax take (there does have to be a limit I guess).

    Taxes on consumption are so much more efficient you know 🙂

    • Thanks, Simon!

      It’s a good point and one I should have addressed in my post.

      You are talking about the Laffer curve; an economic model which states that tax revenues would be zero at rates of 0% and 100% and that somewhere in between there is a peak, where there is a particular optimum tax rate which produces the most income.

      In your argument you are assuming that our current rates are at or higher than this optimum rate and therefore raising taxes would lead to lower tax revenues.

      In my argument I am assuming that our current rates are below this optimum rate and therefore raising taxes would lead to higher tax revenues.

      No one knows exactly where the peak is but I do believe it is well in excess of the current rate.

      Nobel prize winner Paul Krugman explains this much better than I ever could here.

      Cheers

  2. Pingback: The Tax Delusion « Musings of a Red Eared Rabbit

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